HMRC's overbearing predilection for treating taxpayer mistakes as deliberate is common knowledge amongst the profession. Tony Monger, Director of Tax Investigations at Mazars, explains why, in the context of a recent case that should never have needed to go to tribunal, and asks if the so-called Independent Internal Review really serves a worthwhile role for the taxpayer.
Our firm recently won a case at the Tribunal or, to use the more formal language of the Courts, the Tribunal decided a case in favour of our client. You would think that we would be celebrating – but we aren’t. The facts of the case were very simple and straightforward. The client omitted a dividend from his personal tax return. It was a substantial dividend, of several hundred thousand pounds, and came from the company of which he was a director. Unfortunately, due to the timing and the circumstances – it was voted just before the end of the tax year, on 31/3/2016, and credited to his Director’s Loan Account in the next tax year, in May 2016 – it was overlooked when his return was prepared. A bystander might view this as nothing more than an oversight on his part but, for tax purposes, you have to concede that the taxpayer must have been ‘careless’ in filing an incorrect Tax Return because he failed to do what a ‘prudent and reasonable man would do’ – which is how carelessness is defined – and did not thoroughly check all of the entries on his tax return before signing it.
Careless or Deliberate Behaviour
Fortunately, if a penalty is imposed for careless behaviour, it is possible for the penalty to be ‘suspended’ and subsequently wiped out, provided that the taxpayer can meet a set of conditions that would help him or her to avoid becoming liable to another ‘careless’ penalty. If the taxpayer meets the conditions during the suspension period, then at the end of the suspension period, the penalty is cancelled. It was easy to envisage a set of conditions that would meet those criteria for our client so it should have been a relatively simple matter to see this case being brought to settlement without him having to pay a large penalty. But it wasn’t – because HMRC decided that, rather than being careless, our client must have acted deliberately. And a deliberate penalty is not only much bigger, but also cannot be suspended. The suspension of penalties only applies if the behaviour of the taxpayer is nothing more serious than carelessness.
So, what is required for an offence to be categorised as deliberate? The simple definition of deliberate behaviour is of something done with both knowledge and intent – In effect, for a tax offence, it is necessary for the taxpayer both to know that he is committing an offence and to intend to evade tax. HMRC’s argument was that our client knew that he had had a dividend to which the response is that, of course he knew he had had a dividend, he had voted for it and signed the minutes of the meeting at which the voting of the dividend took place. However, it is not an offence to vote a dividend or to know that you have had a dividend. The offence only occurs when you submit an incorrect tax return and the question then becomes one of whether the client knew, when he signed the return, that there was a dividend missing. And the answer is, of course, that he didn’t – It was an oversight, an omission that he simply didn’t spot.
Burden of Proof
In any case where HMRC allege careless or deliberate behaviour, the burden of proof falls upon HMRC and in our client’s defence we pointed out a number of factors which ran counter to an allegation of deliberate behaviour, not least of which was that taking a dividend is one of the most tax-effective means to legally extract funds from your company. If you are intending to evade tax, then failing to declare your own dividends on your tax return is not the obvious choice of the tax evader! Furthermore, the very same dividend that our client had inadvertently omitted from his personal return had been declared in the Company accounts that he had signed. Was this the action of a man who was intending to evade tax? Of course it wasn’t.
As we say, we recently won the argument at the Tribunal where the Tribunal agreed with our contention that our client’s behaviour was nothing more serious that simple carelessness. Suspension conditions have been agreed and the (much lower) careless penalty has been suspended. Why then are we disappointed?
The disappointment is in the fact that we had to take such a case to Tribunal in the first place. The Tribunal decided to only give a summary judgement, so that the case will not be published on the Tribunal website (which is why we have not named our client) but reaction from peers and colleagues who have read the judgement has been to ask “What was the basis for HMRC’s argument that this was a deliberate offence?” – because, to be frank, it is difficult to spot any such argument from the judgement. When we explain that HMRC argued that the client must have known that he had a dividend because he voted for it, their response is one of disbelief and their consistent comment is that it should never have been necessary to take such a case to Tribunal.
Independent Internal Review
And they are right. When the Tax Tribunals were introduced in 2009, in place of the old Hearings before the Commissioners, the legislation introduced a safeguard in the form of an ‘independent internal review’ that was intended to act, much in the way of a cricketing ‘long-stop’, to prevent inappropriate cases going forward to the Tribunals. This was because it had been recognised that there was nothing in the old system to prevent a maverick Inspector from taking an – how can we put it? – unsustainable stance and holding on to it, no matter how insane that stance might be, leaving the taxpayer with no options other than to accept a charge that he knew was wrong or take the argument to the Courts. Sometimes, unfortunately it was cheaper for the taxpayer to settle than argue – and sometimes it seemed as though the Inspector was just keen to see his name forever enshrined in the Tax Case record. And thus the legislation was changed to introduce the Independent Internal Review with the intention of ensuring that the Courts’ time was not wasted on cases where the individual inspector handling the case was presenting an unsustainable argument.
Unfortunately a decade has passed since that worthy aspiration was enshrined in law but anecdotal evidence – along with a number of Tax Cases like this one – suggests that the Independent Internal Reviewers are not performing their role correctly and, indeed, there is even a suggestion that in some circumstances the Independent Internal Reviewers are simply providing a rubber stamp to the decision of the caseworker. Beyond the Reviewers is a further level of scrutiny at HMRC’s Solicitors Office who are tasked with actually presenting the case at Tribunal. The author has known some cases to be ‘pulled’ by Solicitors Office mere days and weeks before a case was due to be heard. In what might be viewed as a face-saving exercise – and, no doubt, in efforts to prevent a claim for costs – the Appellant tends not to be told precisely why Solicitors Office decides to pull a case but even then, some cases still slip through, forcing the taxpayer to the cost, time and stress of arguing their case at Tribunal.
And rest assured, there is indeed a cost to attending a Tribunal. Even an unrepresented taxpayer will have the cost of attendance but more typically every appellant will probably have the cost of providing bundles of the documents on which they intend to rely, as well as copies of any legislation or Tax Cases they intend to quote. Additionally, as in our client’s case, when there is a question of motive, the appellant’s evidence will often require the preparation of a Witness Statement and the associated stress of appearing and answering questions in the Witness box – Never a pleasant experience at the best of times.
So why then is the safeguard of an Independent Internal Review not working? There is some largely hearsay evidence to the effect that the reviewers lack the technical expertise to judge the matters that they are being asked to rule upon. The Church of Taxation is a house of many rooms with a great many strange and peculiar rules that are specific to the tax and the circumstance in which they apply. Is it reasonable to expect a recently appointed reviewer – often one with little experience – to be able to opine upon them all? The more cynical may suggest that their judgement may be swayed by the amounts – in our client’s case a ‘deliberate’ penalty of over £20,000 – at stake.
As we say, in this case, fortunately, the Tribunal found in our client’s favour. So, are we disappointed that we won the case? No, of course not. But it is a disappointment and a sad indictment of the system that we ever had to take this matter to the Tribunal in the first place.